Supplementary Budget 2020

SA economy to see worst contraction in 90 years

The SA economy is said to contract to levels last seen since the Great Depression of the 1930s.
The SA economy is said to contract to levels last seen since the Great Depression of the 1930s.

South Africa will record its worst economic performance since the Great Depression with Treasury projecting a contraction of 7.2% because of the Covid-19 pandemic has exacerbated the already weak economic environment.

During the tabling of the special adjustment budget on Wednesday, Finance Minister Tito Mboweni spoke frankly about the negative impact of the pandemic on the world economy that is set to contract by 5.2% with millions of workers losing their jobs. 

"The South African economy is now expected to contract by 7.2% in 2020. This is the largest contraction in nearly 90 years."

Mboweni noted that domestically, the unemployment rate reached 30.1% for the first quarter of the year.

Mboweni said that if economic growth continues to stagnate, we would risk having a sovereign debt crisis."A sovereign debt crisis is when a country can no longer pay back the interest or principal on its borrowings. We are still some way from that. But if we do not act now, we will shortly get there," he said.

University of Western Cape Professor Matthew Ocran said that in the wake of the coronavirus shock, it will be difficult to achieve growth. "Over the past 20 years, even before the coronavirus hit, growth was nothing to be proud about. Indeed, for the last 10 years, gradually growth has been slowing down," said Ocran.

Ocran said it has become more pertinent to address the structural issues which have been holding back growth. "Until we do that, we are going to have a very pedestrian, lacklustre economic performance," he said. There is even a risk that South Africa will have to turn to multilateral institution such as the IMF for financial support. "It will be a pity if we allow ourselves to get to that stage," he said.

Mboweni echoed this as he explained the country's budget deficit would swell to 14.6% of GDP. This is starkly different to Treasury's February projection for a budget deficit of 6.8%. Ratings agency Moody's in March predicted a deficit of 8.5%. Both these projections were tame, in comparison to private sector players like Investec which expected a 15% budget deficit. 

"Our early projection is that gross national debt will be close to R4 trillion, or 81.8% of GDP by the end of this fiscal year," Mboweni said. Previously Treasury estimated the debt-to-GDP to be 65.6% or R3.56 trillion.

"Without external support, these borrowings will almost entirely consume all of our annual domestic saving, leaving no scope for investment or borrowing by anyone else. For this reason, we need to access new sources of funding," Mboweni said.

"Government intends to borrow $7 billion from international finance institutions to support the pandemic response. We must make no mistake, these are still borrowings. They are not a source of revenue. They must be paid back," Mboweni said.

ZAR/USD
16.77
(-0.03)
ZAR/GBP
21.15
(-0.12)
ZAR/EUR
18.95
(-0.03)
ZAR/AUD
11.66
(-0.03)
ZAR/JPY
0.16
(-0.09)
Gold
1798.22
(+0.06)
Silver
18.69
(+0.13)
Platinum
824.50
(+0.30)
Brent Crude
43.14
(+2.10)
Palladium
1961.36
(+0.61)
All Share
55417.89
(-0.66)
Top 40
51154.08
(-0.74)
Financial 15
10472.31
(+1.28)
Industrial 25
76134.69
(-1.67)
Resource 10
52483.78
(-0.20)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
Results
I'm not really directly affected
18% - 1961 votes
I am taking a hit, but should be able to recover in the next year
23% - 2568 votes
My finances have been devastated
34% - 3818 votes
It's still too early to know what the full effect will be
25% - 2748 votes
Vote